Deepening geopolitical risks, persistently high inflation, and rapidly evolving AI dynamics have many investors looking for ways to stay invested with less volatility. One way to do so is to exchange upside for consistent distributions via equity derivative income ETFs. These strategies are emerging as a go-to option for investors, providing attractive yield potential and equity participation with a more controlled risk profile.
The derivative income category has grown from $6 billion to more than $175 billion over the past five years, and we expect that momentum to continue1. In just the last two years, issuers have launched 174 new equity derivative income ETFs. Though 168 of them are classified as actively managed, the majority use a passive index or individual position as the underlying holding2. When looking under the surface, you will likely find that the underlying portfolio is not truly “active” for most of these funds.
To Note: One Size Doesn’t Fit All
As investors evaluate the equity derivative income landscape, it’s important to recognize that these ETFs can differ meaningfully in their target objectives, upside limits and distribution classifications. This variety provides flexibility in how to generate and use the income these strategies may produce, but it also makes product selection nuanced, requiring careful due diligence to ensure the strategy aligns with the intended outcome.
J.P. Morgan: A One-Stop Shop for Derivative Income
J.P. Morgan is the only asset manager that has a full suite of premium income products that allow investors to “pay as you go,” “prefer to defer,” or “reinvest.” Income funds JEPI ($44.7bn) and JEPQ ($39.9bn) are the top funds in the derivative income category by AUM3, and we’ve extended our reach to tax deferred yield funds ROCY and ROCQ as well as total return fund JOYT. See below for a breakdown of each strategy.
JEPI and JEPQ: The pioneers of the derivative income space
The JPMorgan Equity Premium Income ETF (JEPI) and the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) are designed to deliver monthly income and equity market exposure to their respective benchmarks, the S&P 500 and Nasdaq 100, with less volatility. The income distributed is taxed primarily as qualified or ordinary income, so investors must pay taxes in the year that the income is distributed.
JEPI and JEPQ are most suitable for investors who value current income and smoother return patterns over the tax profile of distributions.
Did you know: Adding a 15% JEPI allocation to a 60/40 US ETF portfolio (60% BBUS, 40% BBAG) since inception would have lowered volatility from 11.10 to 10.76, increased the Sharpe ratio from 0.67 to 0.70, and boosted SEC yield from 2.38% to 3.26%4.
ROCY and ROCQ: The next evolution in lower-volatility yield
The JPMorgan Equity Premium Yield ETF (ROCY) and the JPMorgan Nasdaq Equity Premium Yield ETF (ROCQ), the latest additions to JPMorgan’s derivative income lineup, are designed to deliver yield and equity market exposures to their respective benchmarks, the S&P 500 and Nasdaq 100, with less volatility. Unlike JEPI and JEPQ, ROCY’s and ROCQ’s distributions can potentially be classified as a return of capital (ROC), qualified dividends, or ordinary dividends*.
ROC refers to the portion of a distribution from an investment that is not considered taxable income, because, for tax purposes, it is treated as a return of part of the original investment. ROC distributions are not taxed currently; however, they generally lower an investor’s adjusted basis in an investment. By lowering basis, such distributions ultimately result in a proportionately higher capital gain (or a smaller capital loss) when the investor sells the shares.
ROCY and ROCQ are most suitable for investors who prefer the ability to delay taxes and are comfortable with a reduced cost basis.
Did you know: ROCY and ROCQ received approximately $250 million in inflows in May, a 300% month-over-month increase from April, their first full trading month5.
JOYT: A tax-efficient total return framework
The JPMorgan Equity and Options Total Return ETF (JOYT) is designed to provide total return with less volatility compared to the S&P 500. Dividends from the underlying stocks are distributed quarterly, while the options premium is recycled back into the ETF’s NAV, potentially expressing more of the total return through share price appreciation rather than cash distributions. A key benefit in that scenario is the chance for lower ongoing taxable distributions, with the likely tradeoff being a less attractive distribution profile.
JOYT is most suitable for investors who prioritize total return and compounding and are comfortable realizing returns primarily through NAV movement.
Did you know: Since inception, JOYT has delivered more up-capture (75.68%) than down-capture (73.97%) to the S&P 5006.